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Worldcrunch

Globalization Vs. Localization - Time To Rethink The Economics Of Emerging Markets

Article illustrative image Partner logo Foxconn factory in Shenzhen

BEIJING - The 18th century British scholar Thomas Malthus predicted that when population growth exceeded agriculture's capacity to support new population numbers, it would lead to starvation and misery.

His prediction was wrong, because he did not take into account the impact of scientific and technological progress. His name has since become an adjective for referring to false prophets and pessimists.

In the past decade, the term "globalization" has flooded the media, marking the end of geographical, cultural, financial, and economic boundaries. With the liberalization of many economies, labor as well as capital and technology were suddenly able to flow around freely – it was as if the world had become flat.

While the developed countries’ manufacturing sector faced a crisis, emerging countries were rapidly rising. Because of lower costs, much of the world's production shifted from mature markets to emerging markets, marking a critical turn. Returns on investments in emerging countries surpassed those of many developed economies.

However, recently this trend has started to slow down or even reverse – some U.S. companies have reportedly started to move their offshore manufacturing back home. This is partly due to the increase in oil prices, which drives transportation costs up – and partly because wages in countries like China have gone up significantly. In addition, pollution is forcing some Chinese cities to reduce or stop their manufacturing and production. The threat of a currency war also threatens offshore production. Finally, new manufacturing technology such as 3D printing will also contribute to making production become more individualized or localized.

Globalization is quickly losing ground, throwing the future of the manufacturing sector in emerging countries into doubt.

If there’s anything in common between Malthus’ theory and globalization, it’s perhaps that when a notion becomes a phenomenon, it tends to lead to exaggeration and even panic, which will ultimately result in extreme views. This is certainly the case in the globalization vs. localization debate.

Globalization is a powerful phenomenon but it’s not without limits. When markets regulate themselves, cross-border wage differentials self-correct. Oil prices rise and fall, depending on supply and demand: excessive oil prices reduce orders for overseas production, which in turn curbs the demand for oil, resulting in the stabilization of oil prices – and vice versa. And finally, because of health concerns, industrial pollution is reduced. Wages, oil prices and pollution all show that shifting production to emerging markets has its limitations. The quantitative easing measures taken by various countries’ central banks will also lead to exchange rate instability and further restrict offshore production.

So-called “additive manufacturing” is also contributing to the reversal of globalization. For many people, manufacturing “additively” using new technologies such as 3D printing may still be a strange concept, but it has been gaining momentum. Additive manufacturing takes drawings from CAD (computer aided design) and divides them into cross-sections, which are printed one layer at a time and merged to become a 3D object.

This allows users to create and print out objects instantly, bypassing overseas production and transport. This is the same as printing an email at home instead of receiving a letter though the post office. This kind of 3D technology allows large-scale individualized customization and localization avoiding large-scale production in the emerging markets. This new technology cast a doubt on the manufacturing advantage and cost-effectiveness of producing in emerging markets.

Undoubtedly, 3D printing will change the way many products are manufactured. However, it’s too early to predict how it will evolve and if it can be applied on a large-scale. It is tempting to break with mainstream ideas, but in reality many factors come into play, rendering predictions for the future very difficult. Three-dimensional printing is not free, so it’s about comparing costs and efficiency. And if shale gas extraction technology continues to progress, a fall in oil prices will work in favor of offshore production.

Rising labor costs in emerging countries

Cross-border wage differentials are also an important factor to be taken into account. The fact that mature markets' wages have stagnated while emerging markets' wages have increased has reduced one of the main advantages of offshore production. Added to this, certain countries such as China are experiencing labor shortages. However, if China relaxes its “hukou” household registration system and allows the free movement of workers between different towns and provinces, it will probably be beneficial for China’s wage differential.

In other words, 3D printing costs have to be reduced in order to offset decreasing oil prices and wage differentials for it to be more cost-effective than offshore production.

In the long term this could happen, but it is still too early to know when – this could depend on the need for customized products. Nevertheless, however these factors evolve, thanks to increasing wealth, the emerging countries’ manufacturing sector will continue to benefit from the structural increase in domestic demand.

While many pessimists are worried about its aging demography, China should continue to enjoy its demographic dividend in the next decade. This is because the majority of China’s population is still at the most productive age, with spending power. In Africa, however, the population is too young so it can only consume instead of producing. If China relaxes its one-child policy it will further ease the pressure of an aging population.

People tend to follow mainstream ideology and ignore other factors. We can be convinced that nothing can stop the momentum of globalization, or we can be over-anxious about emerging countries losing their competitive advantages. In reality, each country and each region has its own relative advantages.

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